ROME, Sept 24 (Reuters) - The governor of Italy's Lazio
region resigned on Monday over a corruption scandal that could
increase political instability in debt-plagued Italy before
elections due next year.

Italy's regions, which largely control significant areas of
spending including health, are under scrutiny as the government
of Prime Minister Mario Monti tries to enforce spending cuts to
ease one of the major debt crises afflicting the euro zone.

Allegations of embezzlement of party funds largely involve
members of Silvio Berlusconi's People of Freedom (PDL) party and
risk tarnishing both the group and the former prime minister,
who has hinted he may seek re-election in the spring.

PDL member Renata Polverini gave in to massive pressure to
resign on Monday after allegations that members of her regional
government had embezzled and misused party funds. Polverini said
that she had done nothing wrong.

"It's the first time since 1970 that a governor who has done
nothing wrong has resigned. But I do it with my head held high,"
Polverini said.

The scandal erupted earlier this month when the regional
chief of the PDL, Franco Fiorito, was placed under investigation
on suspicion of sending party funds into his own accounts
overseas. In Italy, most party funds are provided by the state.

The case, which is reminiscent of the scandals that wracked
the former Berlusconi government, has sparked public outrage in
an Italy weary of public spending cuts and high unemployment.

Fiorito has offered to give back 400,000 euros
($516,600)after documents seized by investigators and leaked to
Italian media showed that party funds paid for a Sardinian
holiday, a BMW car and shopping at luxury fashion brand Gucci.

The documents also indicated that 750,000 euros were sent to
his own accounts in Italy and overseas and that more than a
million were put down as "non specified" expenses.

BAD BEHAVIOUR

The portly Fiorito, who has since resigned, fought his
portrayal as the villain in the story by telling investigators
that fellow party members had behaved worse than he did, which
helped turn the spotlight onto Polverini.

"I have never had a credit card, neither have my co-workers,
and no one has made payments with a Lazio Region credit card.
Neither have they made cash withdrawals," Polverini said as she
resigned, blaming opposition politicians for making baseless
allegations.

Before her resignation Polverini began a belated austerity
campaign, putting up posters around the Lazio region - which
includes Rome - and announcing that she had saved 26 million
euro via cost-cutting measures.

Aside from expenses, members of the Lazio regional assembly
earn around 13,000 euros a month, more than ten times the
average salary in Italy, in return for which they sat for 52
days in 2011 and passed 13 bills this year.

The case compounds political uncertainty ahead of elections,
due in spring next year. A similar corruption scandal forced the
resignation in April of the head of the Northern League, a
coalition partner of the previous Berlusconi government.

Apart from Lazio, members of the Campania and Lombardy
regional governments are under investigation for alleged misuse
of public funds.